Vertical Spreads for Aggressive Growth

RichardRimes · Sep 17, 2006

Very nice summary Cache...thanks for taking the time and sharing your thoughts. Especially "at the Margin thinking". It is very similar thinking for me as well but I've never put down on paper specifically "why" I do what I do. Continued success!

rsflint · Sep 17, 2006

Quote from Cache Landing:

I can give you a couple insights as to what I look for, but if you're a methodical person you won't be satisfied.

Set a target % gain for the month!!!!

Thanks for your insights your thoughts. I especially like what you say about risk and reward...an interesting perspective as the trading I started beginning of 2006 has been Farther OTM credit spreads and using the 70-80% capital method. I'll start looking through the journal some more at the beginning.

Flint

frank99 · Sep 17, 2006

CacheLanding,

Excellent and very useful post. thanks for sharing. I have a question for you regarding one of your comments:

"You always here the statement, "cut losses short and let winners run". If you intend to be a premium seller, toss that statement into the garbage, and never consider it again. It is one of the most worthless statements you could make as a credit spreader. "

Can you elaborate on this? Are you referring to the "cut losses short" or "let winners run" when you say toss that statement into the garbage?

thanks,

Frank

Quote from Cache Landing:

I can give you a couple insights as to what I look for, but if you're a methodical person you won't be satisfied.

Set a target % gain for the month!!!!

1) Develop a directional forecast to determine whether I'm bullish/bearish.

2) Determine a volatility forecast to determine whether I'm short/long vega.

3) If I'm quite confident in my directional forecast, I will commit to a larger position further OTM, with the intent of holding through expiry. A credit spread will rarely be more than 1 sigma OTM. I go further OTM when more confident because this means I don't have to work as hard for the gain.

Less adjustment = Less commiss/slippage = More profit.

If I'm a little uncertain in my forecast I will bring the short strike closer to the underlying. This allows me to capture quick profits easier and risk less. You will almost never see me open a direct hedge.

4) Decide if I intend to hold till expiry, or capture quick profits. This has more to do with how choppy the market is.

Always remember to think "at the margin". If you opened a CTM credit spread and you've made 50% of your max profit in two days, your r/r has just changed dramatically. If you were originally risking $10K to make $5K (r/r = 2:1), you are now risking $12,500 to make $2,500 (r/r = 5:1). If your confidence in the position didn't increase proportionately with the risk increase, then thinking "at the margin" would tell you to take the gains off the table.

You always here the statement, "cut losses short and let winners run". If you intend to be a premium seller, toss that statement into the garbage, and never consider it again. It is one of the most worthless statements you could make as a credit spreader.

Anyway, my forecasts are based on both TA and FA, but as I've said before, 95% of TA is worthless. FA is great but has no timeline. I feel that I need both to succeed.

You'll find out more about my strike selection by reading through this entire journal or just following along from here. I generally post a few insights each time I open a position.

And no..... I don't intend on opening any bull put spreads right now. It is against every fiber of my being to sell a put spread after a big bull move when we are sitting right at demonstrated resistance. We'll see what happens after the FOMC mtg. I'll consider scaling in slowly to some bull puts if we drop back to 1290 or lower, but preferably 1280.

ChrisM · Sep 17, 2006

Quote from Cache Landing:

And no..... I don't intend on opening any bull put spreads right now. It is against every fiber of my being to sell a put spread after a big bull move when we are sitting right at demonstrated resistance.

This feeling is common. If I open position against the bullish trend I`ll feel fine even if my calls get overrun, but if I opened puts ... I would kick myself if I could

Cache Landing · Sep 17, 2006

Quote from frank99:

CacheLanding,

Excellent and very useful post. thanks for sharing. I have a question for you regarding one of your comments:

"You always here the statement, "cut losses short and let winners run". If you intend to be a premium seller, toss that statement into the garbage, and never consider it again. It is one of the most worthless statements you could make as a credit spreader. "

Can you elaborate on this? Are you referring to the "cut losses short" or "let winners run" when you say toss that statement into the garbage?

thanks,

Frank

In a way I'm referring to both parts, but more so to the "let winners run" part. When you sell ATM/OTM credit spreads you are automatically limiting your potential profit. It is worth it because you are also combatting theta and limting losses as well. Anyway, it does you no good to try to let a credit spread run. You'll just find yourself in a situation where you are risking a reversal that would take back all your paper gains, all for the sake of making a couple extra bucks. Like I said before, the r/r gets worse as you accumulate paper gains on these positions.

Regarding the cut losses part, you should be able to cut losses, but on an ATM/CTM credit spread, don't be afraid of your short going ITM.

I'm out of time, but if you'd like more explanation, just let me know, and I'll get back to it.

Cache

Neoxx · Sep 17, 2006

Quote from Cache Landing:

For those interested, I'm looking to open positions in the following;

Bearish
KBH (OCT 45/50 calls)
DVN (haven't decided yet)
BRCM (OCT 30/32.5 calls)
AAPL is awfully tempting
SHLD (long puts if resistance holds)

Bullish
OIH (OCT 120/115 puts)
NEM or PAAS (haven't decided)
GS (on any decent retrace toward 155)
LEH (any retrace toward 68)

Any opinions/input welcome. Have a great weekend!!!!

SHLD is looking great for some puts, especially if Monday allows an entry closer to 160.

I also like KBH for a quick play.

Why not short OIH when it fills the gap?

Look at ICE and GENZ for your bullish on retrace list.

Just my 0.02.

frank99 · Sep 18, 2006

Cache,

Thanks. That definately clarifies it for me. I'm looking to open up some new positions this week, and will keep that in mind as soon as I get a decent profit (assuming I get a profit).

Frank

Quote from Cache Landing:

In a way I'm referring to both parts, but more so to the "let winners run" part. When you sell ATM/OTM credit spreads you are automatically limiting your potential profit. It is worth it because you are also combatting theta and limting losses as well. Anyway, it does you no good to try to let a credit spread run. You'll just find yourself in a situation where you are risking a reversal that would take back all your paper gains, all for the sake of making a couple extra bucks. Like I said before, the r/r gets worse as you accumulate paper gains on these positions.

Regarding the cut losses part, you should be able to cut losses, but on an ATM/CTM credit spread, don't be afraid of your short going ITM.

I'm out of time, but if you'd like more explanation, just let me know, and I'll get back to it.

Cache

Cache Landing · Sep 18, 2006

Quote from frank99:

Cache,

Thanks. That definately clarifies it for me. I'm looking to open up some new positions this week, and will keep that in mind as soon as I get a decent profit (assuming I get a profit).

Frank

There are two things that might help you in deciding when to take profits. The first has to do with increased risk that I already mentioned above.

The second has to do with compounding gains more frequently. Which would you rather have;

1) 5% return on account every month
2) 2.5% return every two weeks
3) 1.25% return every week

Obviously, #3 is going to provide the largest returns. Many credit spreaders forget the concept of compounding. They will sell a 10-point SPX spread 1 month from expiry for $1. Ten days later it will only be worth 0.40 but they still hold it because it still has a pretty high value that they are giving up. They never stop to think that if they offset the position, they will free up all that margin and would be able to open another position with a much more desirable risk profile. They could potentially get another return equivalent in size to the first one.

Now instead of getting one 11% return, they are getting two 6% gains.

The point is that contrary to popular belief, it is generally a good idea to consider taking profits early. JMHO.

Cache

jychiu · Sep 18, 2006

Cache,
I learn so much with your good description, your coverage is wide that it addresses various angles.

You have mentioned that need not be afraid with the short going ITM, could you share your adjustment strategy ? Or you simply use the probability of chance to see how it settles since the risk vs reward ratio is 2:1 (just another 2 more months to make it back).

Saw your chart having the RSI and Stochastic, could you share your entry criteria (unless it is a trade secret) ?

Thanks is in advance for the chance to learn.

Quote from Cache Landing:

Regarding the cut losses part, you should be able to cut losses, but on an ATM/CTM credit spread, don't be afraid of your short going ITM.

I'm out of time, but if you'd like more explanation, just let me know, and I'll get back to it.

Cache [/B]

domestic · Sep 18, 2006

all my credits are bought back, every month as a rule. i cannot tell you all how many times doing that made a winner out of a nail biter...

Quote from Cache Landing:

Obviously, #3 is going to provide the largest returns. Many credit spreaders forget the concept of compounding. They will sell a 10-point SPX spread 1 month from expiry for $1. Ten days later it will only be worth 0.40 but they still hold it because it still has a pretty high value that they are giving up. They never stop to think that if they offset the position, they will free up all that margin and would be able to open another position with a much more desirable risk profile. They could potentially get another return equivalent in size to the first one.

Now instead of getting one 11% return, they are getting two 6% gains.

The point is that contrary to popular belief, it is generally a good idea to consider taking profits early. JMHO.

Cache